3/14/2006 @ 6:00AM

Q&A: Bill Emerson, CEO Of Quicken Loans

It’s hard to imagine how a mortgage could be called “exotic.” But that term is often used to describe interest-only loans or a newer type of mortgage called an option adjustable rate mortgage, or option ARM. You won’t find them in Hawaii wearing leis around their necks. But the word “exotic” connotes how much they differ from a traditional mortgage. Borrowers with interest-only loans don’t pay down any of the loan’s principle for a period of time. And option ARMs allow borrowers to pay even less than the interest, so the principle actually grows. These are also called “negative amortization loans.”

Forbes.com spoke about these nontraditional mortgages with Bill Emerson, CEO of Quicken Loans, the largest online mortgage lender, which closed $16 billion of home loans in 2005, compared with $12 billion the year before. (
Intuit
bought Quicken in 1999, but founder Dan Gilbert bought it back in 2002 with a small group of investors.)

Emerson offered his predictions for the 2006 housing market (there’s no bubble, he says). He also discussed the infamous yield curve, which inverted in late December. That means yields for two-year U.S. Treasury bonds rose above those for ten-year bonds, which is sometimes a sign of impending recession. Emerson’s opinion: Don’t head for the border just yet.

Forbes.com: You have said you don’t think there’s a housing bubble.

Emerson: A housing bubble? No, I don’t think there’s a housing bubble. We’ve been talking about it now for three or four years, and I think if we talk about it long enough, sooner or later it may eventually happen. But I see nothing that would indicate that. If you look at home prices since they started tracking this in 1969, you have not had a median home price go down on a national basis.

There are certainly areas of the country that are going to see some cooling off from an appreciation perspective. I don’t think you can go at double-digit rates on a sustainable basis. I do think this year you’ll see some of those areas drop into single-digit rates, and probably the national average will drop into the single digits this year. But to say there’s a housing bubble and to say prices are going to just crash and burn, there’s no fundamentals that would indicate that’s going to happen.

What are you expecting in 2006?

I think 2006 from a housing perspective is going to be a strong year; 2005 was a record. But if you look at any of the data that comes out, from the Mortgage Bankers’ Association or the National Association of Realtors, I mean, you’re probably talking about a little bit of a cool-off in 2006, but you’re talking maybe 3% or 4%, which would put 2006 as maybe the second-best year on record. When you look at that and you factor in that long-term interest rates are still very, very low and that employment is still very strong, there’s just a great opportunity for people to still invest in housing in 2006.

The inverted yield curve: big deal or nothing to worry about?

I think right now it’s probably a little bit overplayed. I mean, yes, the yield curve did invert; the two-year and the ten-year curve did invert. But the Fed funds rate and the ten-year did not invert. I think any time there’s an inversion, that’s certainly a signal that says, wait a minute, the Fed might have gone a little too far.

The economy is still doing well, and inflation is still under control. Those are the main things that the Fed is worried about. As you’ve seen, short-term rates have increased, and long-term rates haven’t increased. That’s a message from the bond markets saying that they don’t fear inflation. If anything, in the next six months, the Fed should probably take a look at–depending how things go–maybe cutting back a little bit from where they currently are.

New, controversial mortgage products have proliferated that help more people buy their homes: Adjustable rate mortgages and interest-only mortgages are two of the most commonly known. There are also “option ARMs,” or option Adjustable Rate Mortgages, which sometimes allow a minimum payment less than the interest on the loan, and many lenders are offering first and second mortgages at the same time.

To what extent do you rely on these products at Quicken?

The adjustable rate mortgage products last year, in the second half of 2004 and into 2005, were very important to us. Because at that time, you had a pretty big gap in the yield curve and short-term interest rates were much, much lower. And when people have an opportunity to save money on a three-year adjustable or a five-year adjustable, to be able to do that in the short term and get some security for three or five years, but really be able to save two, three, four hundred dollars per month, then it makes sense for people who are managing their mortgage.

On the flip side, like we see right now in the market, where there’s a flat yield curve, we have a lot of people moving from adjustable rate mortgages into a fixed-rate mortgage, which absolutely makes sense right now. But if you were on adjustable for the past two or three years, congratulations, because you saved a lot of money.

I think the interest-only stuff–I really do think it gets a bad rap. Obviously, you need to look at the client you’re talking to and figure out what makes the most sense. But clients have gotten more savvy about managing their debt. As a result, the interest-only option gives them flexibility.

What about option ARMs?

Well you know, an option ARM gives you the interest-only option. And what it does is it gives you one more opportunity, and that is the opportunity to really be in a situation where it’s considered a negative amortization loan [i.e., the loan balance rises]. I think that’s something that for the right person–depending on what they’re doing–if they’re going to be in a home for a short period of time, they know what they’re trying to accomplish, and they have some equity in their property, then I think it makes sense. Does it make sense for everybody? I don’t, and I think that’s a situation where you need to be getting the right advice.

There’s been some controversy surrounding these products. A group of federal regulators, including the Federal Deposit Insurance Corp. (FDIC), have proposed new guidelines that could restrict these mortgage products. Some critics have charged that they’re given to people who really can’t afford them.

I really can’t comment on what other people are doing. From our perspective, it is a program we’ve offered in the last six months. It’s something that we don’t do very much of, and we’re very, very cautious and careful. First of all, how we train on it, and second of all, how we sell it to our clients. …We do very, very little of it. I don’t have it off the top of my head, but I would tell you it’s maybe 1% of our production.